Elizabeth Warren: I’m not running for president

Elizabeth Warren. For many Wall Street leaders, the name is like the sound of their impeccably manicured nails scratching against a blackboard. They have tried to marginalize her as left-wing extremist, but so far, her influence and popularity have only grown.

I have known and worked with Warren for many years, beginning with her days as a Harvard law professor and prominent bankruptcy expert to her current role as the senior Senator from Massachusetts. I must profess that the Elizabeth Warren I know respects business and the role it plays in jobs and wealth creation. Yes, she is a champion of the working class, but she couches her arguments in terms of policies that make the markets work better for all Americans. I don’t for the life of me understand what is radical or extreme about that.

So you decide for yourself. I recently sat down with her to discuss her thinking on banking, tax reform, the economy, the plight of the middle class, and the 2016 Presidential elections. –Sheila Bair

Fortune: Congress just effectively repealed a Dodd-Frank prohibition on big banks using FDIC-insured deposits to fund high-risk derivatives, notwithstanding bipartisan opposition led by you and GOP Senator David Vitter. What’s going to happen to financial reform over the next few years? Is this a precursor of things to come?

Warren: I’m not sure what’s going to happen in the next Congress, but I will tell you that I’m madder than hops about repealing the section of Dodd-Frank that is designed to lower risks in exactly the area where the big banks got into trouble. And now we are putting taxpayers back on the hook. They want to take all the profits, but tag the taxpayer with the losses.

And not everyone in the financial industry thinks this is a good idea.

Right. If I were running a competing investment bank that was doing business without deposit insurance, I’d be even madder. These big banks don’t have to compete on a level playing field. I have talked to a lot of nonbank financial players – investment banks, hedge funds –they have to compete for capital on their own. They have to convince their investors to be willing to accept the risks. They have to provide a rate of return to their investors that compensates for those risks. They don’t like competing with a half dozen large financial institutions who enjoy the benefits of deposit insurance and too-big-to-fail status.

You know, when we were talking about doing this interview you put a bug in my brain – you always do.

I’m honored to put bugs in your brain.

You do. And I started thinking about how non-financial businesses are also disadvantaged by this. The last I heard, most Fortune 500 companies are not big financial firms — they don’t have too-big-to-fail government guarantees. That’s worth real money to the big banks. If they had to purchase that kind of insurance against their failure- they would have to pay a lot. Everyone else in the system has to compete for capital against a sector that has a special deal from the government.

Yes. But no one wants to say that publicly.

That’s true. Some business people will say these things to me, but they won’t say them publicly. This gets to the revolving door problem. When too-big-to-fail institutions can place their employees in government positions, it extends their power and intimidates others who don’t have their connections.

I think that is true. There was an article in the American Banker about all the people in this Administration with Bob Rubin and/or Citigroup connections. As individuals, they are fine people, but most seem to have the same worldview and that is a Wall Street-centric view. It’s a giant echo chamber.

EW: We saw this during crisis when you were running the FDIC and I was setting up the Consumer Financial Protection Bureau. I would talk to them not only about families losing their homes and what that meant for the families but also what it meant for the broader economy. And I felt like we weren’t even on the same planet. Our conversations would go right by each other. I’d say look what’s happening to families struggling with their mortgages and their response would be “the banks’ balance sheets can take it.” The idea that mortgage relief was dialed up and down in response to the profitability needs of the big banks, rather than needs of families and the larger economy. It was deeply troubling.

Guess who my favorite President is.

Roosevelt

Correct. Teddy. He was the trust buster.

You know, when I was in law school, they taught us that monopolies were wrong because they hurt price competition. They were a market failure that hurt consumers, and that of course, was true. So you needed to break them up. But if you read Teddy Roosevelt on this – his principle push for breaking up the trusts was because they had too much political power. They overwhelmed the government. It wasn’t so much that they were stronger than government, but they could persuade government to shift the rules to make themselves even more powerful. And when that happens, it’s not just a threat to the economy. It’s a threat to democracy.

This is part of what we are starting to wrestle with. I look at the way regulators kowtowed to big financial institutions in the run up to the crisis. It was a complete failure not only of markets, but also of government. Government didn’t work the way it should.

We forgot about the importance of regulating banks.

We did lose it. And there’s another part of what we lost. You know, banking is not that hard to understand. They try to make it complicated because they can hide what’s going on. It’s a way to back everyone else off from having real oversight about what’s happening. “Nothing to see here. We’ve decided what needs to be done. Don’t worry.” During the run up to Dodd-Frank, after the market crashed, and Congress was trying to figure out what to do, I can’t tell you how many Senators’ offices I walked into and they would say “Wow. These bank CEOs were just here and they tell us that if we get this wrong, we are going to crash the whole economy. We better not regulate.” They were using it to buffalo not just the public, but also the government.

Right, and with this complexity and lack of understanding, comes no accountability. And unfortunately, I think the regulators exacerbate the problem with these hideously complex rules.

You put your finger on it. I believe in small and simple rules. I’m not a fan of the big, complex rules. Complexity is a way to hide the loopholes the special deals. It’s also a way to tilt the playing field toward the big guys. Small companies, start ups, new competitors just get shut out of a complex system. Tell some group that has a new way to deliver financial services to consumers—and they find out it’s going to cost them hundreds of thousands of dollars in fees just to find out if they can make money, much less the costs of all the licensing, vetting that it will take if the decide they want to launch a new business.

And we have a similar problem with our tax code.

Wage earners and small businesses and entrepreneurs are powerfully disadvantaged under the current tax code.

Let me tell you a story. When I was campaigning for Senate, I would walk into a bar, cafe, or retail store, and I would often hear small business owners say that they are Republican because they are worried about taxes. They weren’t sure about me. And I would ask them, you know, you are right. You should be worried about taxes. Now tell me, how much money do you have in the Cayman Islands? Did you move your intellectual property to Europe? How many tax deals have you done? And of course, the answer would always be no, no, and no. The point was that small businesses are carrying full freight. The loopholes are written for the big guys. The only ones who are paying full freight are the little guys.

I did a column about corporate taxes and inversions and I complained that my husband and I have a marginal rate — federal and state — of 53% which is not that uncommon for a professional couple. I got mostly favorable mail on it, but one guy wrote and said “well, why should I listen to you if you aren’t smart enough to find ways around this high rate?” And it’s kind of becoming the American way — to dodge taxes however you can. This complex tax code- it’s corrosive to the culture.

It is corrosive. It penalizes people who just want to pay their taxes. It undercuts the fundamental idea of a level playing field. It undermines the idea that people get ahead because they have good ideas and they work hard, not because they can exploit loopholes. It doesn’t make us a more productive country. It doesn’t create wealth. It doesn’t strengthen our economy. It helps lawyers get richer — I can say that as a recovering lawyer.

So if you were dictator and there were three things you could do to help the middle class, what would they be?

First, invest far more in education.

Second, rebuild our infrastructure, both to put people to work immediately in better paying jobs, but in the long run, to help our economy because strong infrastructure is what encourages businesses to invest and grow. China is investing 9% of its GDP in infrastructure. Here in the US, we are investing about 2.5%. China is building a future for its businesses. We are letting our infrastructure crumble. We have $3.4 trillion in deferred maintenance. If we want to have a vibrant economy going forward, we need safe roads and bridges, power grids, communications networks. That’s the part we all invest in. Even if we didn’t need the jobs, we should do this, but we do need the jobs and infrastructure is an investment in the middle class.

Third, research. I’d invest in research. Medical, scientific, engineering and the reason for that, this is an exceptional country. The investment here would be much smaller than the other two. But it’s the great pipeline of ideas that creative people build off of to turn the research into something extraordinary. And you could go down the list of what government sponsored research has given us: nanotechnology, touch screens, vaccines, gene therapies, GPS – and then, entrepreneurs– people who have worked their tail ends off – they have turned that research into extraordinary businesses that employ a lot of people.

But on education, we spend a lot already. This is an area where Republican and Democrats should join hands, but how can we spend the money more effectively?

Absolutely. For instance, it is outrageous that the federal government today spends billions of dollars helping college students get an education, and asks for almost no accountability for the colleges themselves. It is a scandal.

For-profit colleges account for roughly 10% of all college students, but they account for 25% of federal student aid dollars, and almost 50% of student loan defaults. They target minorities and they target veterans. The Lowell campus of the University of Massachusetts is trying to help veterans who have been targeted by these schools. They’ve seen vets entering U-Mass with as much as $65,000 in student debt and not one single college credit that can transfer to a real school. These young people are already starting in a hole.

So are you going to run for President?

No.

What does the Democratic nominee need to do to win in 2016?

They need to speak to America’s families about the economic crisis in this country. It starts with the recognition that Washington works for the rich and powerful and not for America’s families. From there, it has to go into what changes we need to make, and that gets back to education, infrastructure, and research.

Do you think anyone on the Republican side will sound that theme as well?

I think they might. But for both sides, the proof will be in the pudding. Who is willing to stand up for Wall Street accountability? Who is willing to take on the powerful by closing tax loopholes so that we have the money to invest in education, infrastructure, and research. Who’s willing to make the hard choices? The candidates need to say something concrete. This can’t be a silent game, with a lot of nice platitudes. There needs to be something real.

Obama’s core constituency has lost ground during his Administration. That’s not all on him. This has been a longstanding trend. But things have gotten worse.

The middle class has been under assault for 35 years — the combination of stagnant wages and rising core expenses have squeezed families beyond endurance.

But he hasn’t been able to reverse that trend. What advice do you have for him for his last two years?

Get out and fight for America’s families and be clear what you are fighting for. Don’t just say it once. Give one speech, and then another, and then another. Talk to the Democrats on the Hill to propose the legislation that you want and invite the Republicans in. And ask if there is a way to do it together. But get out there and fight for our families, they need it.

Sheila Bair, the former head of the FDIC, is a Fortune contributor.

Learn more about the 2016 presidential election from Fortune’s video team:

Elizabeth Warren. For many Wall Street leaders, the name is like the sound of their impeccably manicured nails scratching against a blackboard. They have tried to marginalize her as left-wing extremist, but so far, her influence and popularity have only grown.

I have known and worked with Warren for many years, beginning with her days as a Harvard law professor and prominent bankruptcy expert to her current role as the senior Senator from Massachusetts. I must profess that the Elizabeth Warren I know respects business and the role it plays in jobs and wealth creation. Yes, she is a champion of the working class, but she couches her arguments in terms of policies that make the markets work better for all Americans. I don’t for the life of me understand what is radical or extreme about that.

So you decide for yourself. I recently sat down with her to discuss her thinking on banking, tax reform, the economy, the plight of the middle class, and the 2016 Presidential elections. –Sheila Bair

Fortune: Congress just effectively repealed a Dodd-Frank prohibition on big banks using FDIC-insured deposits to fund high-risk derivatives, notwithstanding bipartisan opposition led by you and GOP Senator David Vitter. What’s going to happen to financial reform over the next few years? Is this a precursor of things to come?

Warren: I’m not sure what’s going to happen in the next Congress, but I will tell you that I’m madder than hops about repealing the section of Dodd-Frank that is designed to lower risks in exactly the area where the big banks got into trouble. And now we are putting taxpayers back on the hook. They want to take all the profits, but tag the taxpayer with the losses.

And not everyone in the financial industry thinks this is a good idea.

Right. If I were running a competing investment bank that was doing business without deposit insurance, I’d be even madder. These big banks don’t have to compete on a level playing field. I have talked to a lot of nonbank financial players – investment banks, hedge funds –they have to compete for capital on their own. They have to convince their investors to be willing to accept the risks. They have to provide a rate of return to their investors that compensates for those risks. They don’t like competing with a half dozen large financial institutions who enjoy the benefits of deposit insurance and too-big-to-fail status.

You know, when we were talking about doing this interview you put a bug in my brain – you always do.

I’m honored to put bugs in your brain.

You do. And I started thinking about how non-financial businesses are also disadvantaged by this. The last I heard, most Fortune 500 companies are not big financial firms — they don’t have too-big-to-fail government guarantees. That’s worth real money to the big banks. If they had to purchase that kind of insurance against their failure- they would have to pay a lot. Everyone else in the system has to compete for capital against a sector that has a special deal from the government.

Yes. But no one wants to say that publicly.

That’s true. Some business people will say these things to me, but they won’t say them publicly. This gets to the revolving door problem. When too-big-to-fail institutions can place their employees in government positions, it extends their power and intimidates others who don’t have their connections.

I think that is true. There was an article in the American Banker about all the people in this Administration with Bob Rubin and/or Citigroup connections. As individuals, they are fine people, but most seem to have the same worldview and that is a Wall Street-centric view. It’s a giant echo chamber.

EW: We saw this during crisis when you were running the FDIC and I was setting up the Consumer Financial Protection Bureau. I would talk to them not only about families losing their homes and what that meant for the families but also what it meant for the broader economy. And I felt like we weren’t even on the same planet. Our conversations would go right by each other. I’d say look what’s happening to families struggling with their mortgages and their response would be “the banks’ balance sheets can take it.” The idea that mortgage relief was dialed up and down in response to the profitability needs of the big banks, rather than needs of families and the larger economy. It was deeply troubling.

Guess who my favorite President is.

Roosevelt

Correct. Teddy. He was the trust buster.

You know, when I was in law school, they taught us that monopolies were wrong because they hurt price competition. They were a market failure that hurt consumers, and that of course, was true. So you needed to break them up. But if you read Teddy Roosevelt on this – his principle push for breaking up the trusts was because they had too much political power. They overwhelmed the government. It wasn’t so much that they were stronger than government, but they could persuade government to shift the rules to make themselves even more powerful. And when that happens, it’s not just a threat to the economy. It’s a threat to democracy.

This is part of what we are starting to wrestle with. I look at the way regulators kowtowed to big financial institutions in the run up to the crisis. It was a complete failure not only of markets, but also of government. Government didn’t work the way it should.

We forgot about the importance of regulating banks.

We did lose it. And there’s another part of what we lost. You know, banking is not that hard to understand. They try to make it complicated because they can hide what’s going on. It’s a way to back everyone else off from having real oversight about what’s happening. “Nothing to see here. We’ve decided what needs to be done. Don’t worry.” During the run up to Dodd-Frank, after the market crashed, and Congress was trying to figure out what to do, I can’t tell you how many Senators’ offices I walked into and they would say “Wow. These bank CEOs were just here and they tell us that if we get this wrong, we are going to crash the whole economy. We better not regulate.” They were using it to buffalo not just the public, but also the government.

Right, and with this complexity and lack of understanding, comes no accountability. And unfortunately, I think the regulators exacerbate the problem with these hideously complex rules.

You put your finger on it. I believe in small and simple rules. I’m not a fan of the big, complex rules. Complexity is a way to hide the loopholes the special deals. It’s also a way to tilt the playing field toward the big guys. Small companies, start ups, new competitors just get shut out of a complex system. Tell some group that has a new way to deliver financial services to consumers—and they find out it’s going to cost them hundreds of thousands of dollars in fees just to find out if they can make money, much less the costs of all the licensing, vetting that it will take if the decide they want to launch a new business.

And we have a similar problem with our tax code.

Wage earners and small businesses and entrepreneurs are powerfully disadvantaged under the current tax code.

Let me tell you a story. When I was campaigning for Senate, I would walk into a bar, cafe, or retail store, and I would often hear small business owners say that they are Republican because they are worried about taxes. They weren’t sure about me. And I would ask them, you know, you are right. You should be worried about taxes. Now tell me, how much money do you have in the Cayman Islands? Did you move your intellectual property to Europe? How many tax deals have you done? And of course, the answer would always be no, no, and no. The point was that small businesses are carrying full freight. The loopholes are written for the big guys. The only ones who are paying full freight are the little guys.

I did a column about corporate taxes and inversions and I complained that my husband and I have a marginal rate — federal and state — of 53% which is not that uncommon for a professional couple. I got mostly favorable mail on it, but one guy wrote and said “well, why should I listen to you if you aren’t smart enough to find ways around this high rate?” And it’s kind of becoming the American way — to dodge taxes however you can. This complex tax code- it’s corrosive to the culture.

It is corrosive. It penalizes people who just want to pay their taxes. It undercuts the fundamental idea of a level playing field. It undermines the idea that people get ahead because they have good ideas and they work hard, not because they can exploit loopholes. It doesn’t make us a more productive country. It doesn’t create wealth. It doesn’t strengthen our economy. It helps lawyers get richer — I can say that as a recovering lawyer.

So if you were dictator and there were three things you could do to help the middle class, what would they be?

First, invest far more in education.

Second, rebuild our infrastructure, both to put people to work immediately in better paying jobs, but in the long run, to help our economy because strong infrastructure is what encourages businesses to invest and grow. China is investing 9% of its GDP in infrastructure. Here in the US, we are investing about 2.5%. China is building a future for its businesses. We are letting our infrastructure crumble. We have $3.4 trillion in deferred maintenance. If we want to have a vibrant economy going forward, we need safe roads and bridges, power grids, communications networks. That’s the part we all invest in. Even if we didn’t need the jobs, we should do this, but we do need the jobs and infrastructure is an investment in the middle class.

Third, research. I’d invest in research. Medical, scientific, engineering and the reason for that, this is an exceptional country. The investment here would be much smaller than the other two. But it’s the great pipeline of ideas that creative people build off of to turn the research into something extraordinary. And you could go down the list of what government sponsored research has given us: nanotechnology, touch screens, vaccines, gene therapies, GPS – and then, entrepreneurs– people who have worked their tail ends off – they have turned that research into extraordinary businesses that employ a lot of people.

But on education, we spend a lot already. This is an area where Republican and Democrats should join hands, but how can we spend the money more effectively?

Absolutely. For instance, it is outrageous that the federal government today spends billions of dollars helping college students get an education, and asks for almost no accountability for the colleges themselves. It is a scandal.

For-profit colleges account for roughly 10% of all college students, but they account for 25% of federal student aid dollars, and almost 50% of student loan defaults. They target minorities and they target veterans. The Lowell campus of the University of Massachusetts is trying to help veterans who have been targeted by these schools. They’ve seen vets entering U-Mass with as much as $65,000 in student debt and not one single college credit that can transfer to a real school. These young people are already starting in a hole.

So are you going to run for President?

No.

What does the Democratic nominee need to do to win in 2016?

They need to speak to America’s families about the economic crisis in this country. It starts with the recognition that Washington works for the rich and powerful and not for America’s families. From there, it has to go into what changes we need to make, and that gets back to education, infrastructure, and research.

Do you think anyone on the Republican side will sound that theme as well?

I think they might. But for both sides, the proof will be in the pudding. Who is willing to stand up for Wall Street accountability? Who is willing to take on the powerful by closing tax loopholes so that we have the money to invest in education, infrastructure, and research. Who’s willing to make the hard choices? The candidates need to say something concrete. This can’t be a silent game, with a lot of nice platitudes. There needs to be something real.

Obama’s core constituency has lost ground during his Administration. That’s not all on him. This has been a longstanding trend. But things have gotten worse.

The middle class has been under assault for 35 years — the combination of stagnant wages and rising core expenses have squeezed families beyond endurance.

But he hasn’t been able to reverse that trend. What advice do you have for him for his last two years?

Get out and fight for America’s families and be clear what you are fighting for. Don’t just say it once. Give one speech, and then another, and then another. Talk to the Democrats on the Hill to propose the legislation that you want and invite the Republicans in. And ask if there is a way to do it together. But get out there and fight for our families, they need it.

Sheila Bair, the former head of the FDIC, is a Fortune contributor.

Learn more about the 2016 presidential election from Fortune’s video team: